Is that even a logical question? But …
The Why
Why do dividend cuts happen?
From time to time, we read that some company has reduced or eliminated its dividend. If we were not paying attention, and especially if we are receiving said dividend, we could be in for a shock, or at least a surprise.
This is the same for me. I am usually surprised. No one on the outside can tell what goes on in corporations. If we look at the exact numbers, we can see some companies hold on paying dividends even if business is in a slump. Others turn down the dividend fairly quickly.
Income Woes
When a company experiences income decline combined with high costs, there is always the possibility that the expected turnaround will not come quickly. Thus you see efforts to control costs, and reduce expenses.
Some of the methods to control costs include layoffs, selling or otherwise disposing of some assets, reducing or slowing purchases, and of course dividend cuts.
The Therefore
As a result, dividend cuts do not happen when things are going well. In fact, when things go well enough, dividend increases may occur.
This acknowledgment, that dividend cuts occur when things are not well, does trigger some investors to automatically sell, or at least reduce, their shares. This can be a logical action.
On the other hand, if our goal is to “buy low” (even as dividend investors), and if we consider that since things are not going so well, and that the stock price may decline, then we could consider that this would be a good time to not sell.
If prices decline, then even our reduced dividend will buy more shares than they would if prices did not decline.
In addition, if business improves from its current state, then we would expect that later the stock price will increase.
As a result, I don’t, as a rule, sell when dividends are cut.
The Obverse
In a tangentially related topic, I know someone who sells the changed percent of their shares when the company does a stock split. Namely, if the split is 2 for 1, then they sell 50% of their shares after the spilt. If the split is something else, they sell enough to retain the original number of shares (ignoring of the price adjustment).
Their goal is to retain the same number of shares. Obviously they do not do dividend investing, and they take profits when shares split.
I do not fully understand that strategy, but to each their own.
What do you do for cuts and splits? Let me know here.
The photograph “På breen mellom Jøkelfjord og Langfjord” (On the glacier between Jøkelfjord and Langfjord) was taken in 1881 by the Norwegan explorer Charles Rabot. Courtesy DigitaltMuseum (digitaltmuseum.no), from NVE, Norges vassdrags- og energidirektorat (Norwegian Water Resources and Energy Directorate). License: License: CC BY-SA 4.0 Deed, Attribution-ShareAlike 4.0 International.
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